Lloyds back in black after bad debts ease

Sun shines: Eric Daniels said that bad debts were falling faster than expected

Lloyds Banking Group today said it had returned to profit in the first three months of the year and was on course to do much better than expected for the rest of 2010.

It said it would make a profit both at the half year and full year. Lloyds lost £6.3 billion during 2009.

The bank was bailed out by the Government when it took over rival HBOS a year ago and is 41% owned by the taxpayer. Lloyds shares rose 1.7p to a seven-month high of 72p.

The taxpayer is now sitting on a £2.4 billion profit on its stake in the bank amid increased speculation that any new Government will seek to cut debt by selling off all or part of the publicly-owned stakes in Lloyds and rival Royal Bank of Scotland (where taxpayer profit is at present £7.7 billion).

Chief executive Eric Daniels told investors only a month ago that Lloyds had started the year better than expected.

But today is the first time the bank has said that it has moved back into the black.

Daniels said that bad debts were falling faster than originally anticipated: "Impairments have slowed significantly in the first few months of the year giving us confidence that we will achieve a better financial performance than previously guided.

"I am pleased to report that we returned to profitability in the first quarter and expect this momentum to be sustained throughout 2010."

In particular, Daniels highlighted a "significant slowing of impairments in the wholesale business" which reflects both the recovery in UK commerce but also shows signs that the worst of the toxic debt taken on by Bank of Scotland subsidiary at the height of the credit boom is finally working through the system.

That means bad debts are falling faster than the 21% decline reported in the second half of 2009.

With more potential takeovers or purchases of assets in the offing — ranging from housebuilder Crest Nicholson to Crystal Palace's football ground — finance director Tim Tookie said: "Realisations are happening which shows we have set our impairments on those loans at realistic levels. In some cases we are now selling above the impaired valuation."

The only exception to that trend seems to be in the wealth and international division which is still witnessing a high level of bad debts largely because of its lending against Irish commercial property.

At home both secured and unsecured retail loans are seeing a lower rate of bad debts than in the final quarter of 2009. Customer deposits rose £5 billion in the quarter. Current lending levels remain flat.

Lloyds provided no immediate update on the European-ordered sell-off of some 600 branches including the whole of C&G's network. But Tookie said "We have four years to do that and I'd prefer to have a more profitable retail business to be selling part of."

As for when the Government might start thinking about selling off some of its shares he said: "That's a nice problem for the Treasury to have."

Richard Hunter, Head of UK Equities at Hargreaves Lansdown stockbrokers, said: "The return to profitability in the first quarter of this year provides a long overdue boost to the beleaguered bank."